Credit Analy­sis To Pro­mote Suc­cess­ful Debt Col­lec­tion 5 Of 7

By Dean Kaplan+

Credit analysis will help promote successful debt collection

After the credit depart­ment reviews a poten­tial customer's credit analy­sis, you must decide how to inform the cus­tomer of your decision.

All credit deci­sions made by a credit depart­ment can lead to future debt col­lec­tion chal­lenges. The key is to put enough time and energy into the credit analy­sis to min­i­mize the poten­tial for future delin­quent accounts receiv­able. This is the fifth of a seven part series of arti­cles about things the credit depart­ment can do to eval­u­ate the credit wor­thi­ness of poten­tial new cus­tomers. This arti­cle will focus on deter­min­ing and com­mu­ni­cat­ing the credit deci­sion to a new customer.

Every com­pany involved in extend­ing credit to cus­tomers needs to have a clearly defined credit strat­egy for the credit depart­ment to fol­low. In most cases, this strat­egy will be the credit pol­icy which pro­vides the basis for con­sis­tent credit deci­sions. Credit lim­its are nec­es­sary because they limit the company’s poten­tial for loss. Each cus­tomer must be eval­u­ated because cir­cum­stances are so unique to each customer’s busi­ness sit­u­a­tion. No two cus­tomers are alike due to prod­uct, dis­tri­b­u­tion, and mar­ket differences.

When mak­ing a credit deci­sion for a new cus­tomer, the poten­tial ongo­ing rela­tion­ship must be eval­u­ated. If the cus­tomer is a one-time sale cus­tomer, credit should not usu­ally be extended. Instead, less desir­able terms such as cash on deliv­ery or cash in advance are appro­pri­ate. Cus­tomers who plan to buy now and increas­ingly into the future must sup­ply the credit depart­ment with all requested infor­ma­tion so that they can estab­lish ade­quate credit with your com­pany to sup­port the long-term relationship.

When con­duct­ing the credit analy­sis of a poten­tial new cus­tomer, the eval­u­a­tive process can not be so long that the cus­tomer ends up going else­where. In addi­tion, the cost of con­duct­ing the credit analy­sis must be worth it given the poten­tial sales of the new cus­tomer. Call­ing ref­er­ences, request­ing credit reports, etc. cost money. If the poten­tial new sales from the cus­tomer are very small, it may not be worth­while to go for­ward with the credit analy­sis or the customer.

Many fac­tors can affect the credit deci­sion. If demand exceeds sup­ply at your com­pany, then extend credit only to the low­est risk cus­tomers. If your com­pany has a large stock of inven­tory, credit terms may be more lenient in an effort to clear out excess inven­tory. If the profit mar­gin on a prod­uct is very high, credit terms may be more lenient in an effort to encour­age the pur­chase. If the staffing is very lim­ited in the credit and col­lec­tion depart­ment, terms may be more lenient in an effort to get credit analy­ses done on a timely basis.

Some com­pa­nies have what is called “Auto­matic approval” for orders total­ing an amount less than a pre­de­ter­mined amount. In this case, the risk is con­sid­ered to be low enough not to war­rant the cost of a full-blown analy­sis. Other com­pa­nies base auto­matic credit approval for small orders on the cur­rent credit report­ing agency ratings.

When the order amount is above the limit for auto­matic approval, typ­i­cally the credit depart­ment will require some level of analy­sis which might include: the new cus­tomer appli­ca­tion, cur­rent credit agency reports and rat­ings, most recent finan­cial state­ments, indus­try and sup­plier ref­er­ences, cur­rent bank infor­ma­tion, and phone calls or per­sonal vis­its to the prospec­tive customer’s business.

Once the credit deci­sion has been made, the new cus­tomer must be told the results. One way to deliver the deci­sion is to make a per­sonal visit to the cus­tomer. The advan­tage of this approach is that it gives you the oppor­tu­nity to talk to the cus­tomer and begin to develop a rela­tion­ship with the cus­tomer. It also gives you the chance to explain the credit pol­icy and terms of the credit deci­sion to the cus­tomer. If the credit deci­sion is not as favor­able as the cus­tomer may have hoped, it gives you the oppor­tu­nity to coach the cus­tomer on ways to increase the credit limit.

The dis­ad­van­tage of deliv­er­ing the credit deci­sion in per­son is if the deci­sion is not what the cus­tomer wants to hear. In this case, the cus­tomer may be insulted by the lack of credit extended, and may feel restricted in his abil­ity to place large orders in the future. The cus­tomer may not feel good­will towards your com­pany. If this sit­u­a­tion occurs, being there in per­son may give you a chance to work out some of the issues and even­tu­ally pro­mote goodwill.

Col­lec­tion agen­cies are not involved in mak­ing credit deci­sions for poten­tial new cus­tomers. Debt col­lec­tion issues usu­ally arise when credit deci­sions have been more lenient than per­haps they should have been for a par­tic­u­lar cus­tomer. When debt col­lec­tors become involved with a cus­tomer, usu­ally the credit line has been frozen and all future ship­ments and orders are placed on hold. To reestab­lish credit, delin­quent cus­tomers must bring all accounts receiv­able col­lec­tions to zero, and a new credit analy­sis must be con­ducted. It is easy to see why a credit depart­ment would be hes­i­tant to begin extend­ing credit again to a cus­tomer who has been sig­nif­i­cantly delin­quent in the past. Some­thing must be dras­ti­cally dif­fer­ent to cause a reestab­lish­ment of credit. Col­lec­tion agen­cies and debt col­lec­tors through their col­lec­tions work may be able to deter­mine if the cir­cum­stances have changed in a pos­i­tive way to war­rant credit exten­sion recon­sid­er­a­tion. Extreme cau­tion in this sit­u­a­tion is def­i­nitely appropriate.

Click here if you are ready to go on to the next arti­cle in this seven part series Credit Analy­sis To Pro­mote Suc­cess­ful Debt Col­lec­tion 6 Of 7. Click here if you missed pre­vi­ous arti­cles in the series Credit Analy­sis To Pro­mote Suc­cess­ful Debt Col­lec­tion 1 Of 7.

The Kaplan Group is a bou­tique col­lec­tion agency spe­cial­iz­ing in large (over $10,000) debt col­lec­tions due from busi­nesses. Founded in 1991, the com­pany has a stel­lar rep­u­ta­tion (A+ rat­ing with the Bet­ter Busi­ness Bureau) and is rec­og­nized as one of the lead­ing col­lec­tion agen­cies for results on large and com­plex mat­ters.